The growth of economic activity in Serbia in the coming period could be significantly influenced by the reduction of the tax burden on wages. In this way, the Fiscal Council of Serbia agrees, labor costs would be reduced and thus make the domestic economy more competitive than the countries in the region. At the same time, lower employment costs would stimulate a further fall in the unemployment rate.
Tax rates in Serbia are actually lower than the average of the Central and Eastern European regions and significantly lower than in the developed countries of Western Europe. However, while they are not a source of lower competitiveness of the domestic economy compared to comparable countries, a good tax burden is certainly needed to stimulate Serbia’s currently insufficient economic growth, according to the strategic recommendations for next year’s Fiscal Council budget and fiscal policy.
Fiscal wage relief is possible through a reduction in the rate of social contributions or an increase in the amount of non-taxable income.
Although the differences between the two approaches in terms of existing budget options are not drastic, the Fiscal Council’s recommendation is that progressive wage cuts be made in 2020 to partially offset the effects of the (too) large increase in the minimum wage on employers who predominantly employ low-wage workers earnings.
The potential fiscal space of 20 billion dinars enables a significant increase in the tax-free threshold from the current 15,300 to 25,000 dinars in 2020. If the entire amount of fiscal space were used to increase the tax-free threshold, the burden of average earnings would be reduced from 62 to 60 percent, while in the case of minimum wages the burden would be reduced from 58 to 53 percent.
This would result in a progressive wage burden, where employers and workers with low and below average wages would feel the most relief.
Current announcements by the Ministry of Finance indicate that the Pension Fond contributes a 0.5 percentage point reduction, from 26 to 25.5, and that the non-taxable margin increases marginally from 15,300 to 16,300 dinars. The overall effect of these measures will be to relieve the economy by about nine billion dinars in 2020, with the wage burden being largely proportional.
The fiscal space that could be used to reduce taxes in 2020 is around RSD 20 billion. However, if the budget for 2019 is envisaged, which anticipates wage growth in the public sector significantly above the expected rate of economic growth – fiscal space for tax cuts will be practically halved (to around RSD 10 billion).
The Fiscal Council believes that it is economically unjustified to use limited budget space to reduce VAT rates, and that there is no indication that the current corporate tax rate of 15 percent, which is in line with the regional average, is a significant impediment to economic growth in Serbia. Moreover, the large reductions in this tax in the period until 2012 did not result in a significant improvement of the economic environment.